STOCKS NEWS EUROPE-Smith & Nephew down after MS downgrade

Published 10:34 AM ET Sun, 11 Nov 2012

Shares in Smith & Nephew shed 1.2 percent, among the top fallers on the FTSE 100 albeit in light volume, with traders citing a downgrade by Morgan Stanley to "equalweight" from "overweight" as weighing on sentiment towards Europe's leading maker of artificial hips and knees.

Morgan Stanley cuts its rating on Smith & Nephew on valuation grounds but raises its target price to 696 pence from 660 pence following a solid share price performance over the past 12-months.

Smith & Nephew's shares have rallied 22 percent since Sept 2011 lows, compared with a 15 percent rise on the FTSE 100, leaving the company on a forward 12-month price-to-earnings of 14.2 times, while the UK's blue chip index trades on 11.3 times, according to Thomson Reuters Starmine data.

Morgan Stanley is concerned about growth outlook in the hip and knee market, which would provide a major headwind for the orthopedic peer group, including Smith & Nephew.

Smith & Nephew has an earnings quality score of 90 out of 100 is among the highest of its peers, according to Starmine, meaning earnings in the recent past were robust enough for its growth rate to be sustainable.

It has a forward 12-month earnings per share growth smartestimate of 3.6 percent, the lowest among its peer group, suggesting the market has already priced in weaker earnings from Smith & Nephew.